CONFIDENTIAL
government naturally saw this as an attempt to thwart their policy of maintaining Taiwan's international isolation. Fearful that some countries would see this
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as an opportunity to have their cake and eat it, the Chinese government condemned the "flexible diplomacy" as a policy of two Chinas" or "one China, one Taiwan" (both sides of course believe that there is only one China of which Taiwan is part), and reiterated their position on contacts with Taiwan.
7.
This sensitivity will have been increased further by the events of June. The Chinese leadership will be only too aware of the damage, perhaps irreparable, that these events will have done their strategy for reunification. They will also fear that some countries, alienated by the current regime, will take a more relaxed attitude towards contacts with Taiwan and be more receptive to Taiwanese blandishments, financial or otherwise. A further fear will be that foreign businessmen, disillusioned by political uncertainty and economic problems on the mainland, will switch their trade to a Taiwan politically more stable and awash with cash. These fears will not have been helped by evidence of Taiwanese efforts to take advantage of the PRC's problems. Grenada, Liberia and Belize have already established diplomatic relations with the "Republic of China" and a 117-strong economic mission from Taiwan has visited the Philippines offering to expand investment and trade in exchange for privileges that would verge on diplomatic · recognition. These efforts by the authorities in Taiwan can be expected to continue, and indeed increase, and the sensitivity of the Chinese government to contacts with Taiwan can be expected to increase accordingly.
8.
Over recent years we have been confronted in the UK by a vocal and active "Taiwan lobby" both in parliament and among business circles. This lobby has been well- represented in the Conservative Party, though its supporters are not confined to one political group. Briefed and often feted by the Taiwan authorities and their office in London, it has put pressure on HMG to adopt a more friendly and less restrictive approach in our dealings with Taiwan. It has argued that our negative and hostile approach, in contrast to that of our European partners, has caused resentment among the Taiwan authorities and has led to us losing out commercially. In particular it has criticised the FCO for letting its over-sensitivity to Chinese reactions due to Hong Kong cause it to overlook the significance of Taiwan as a commercial centre and leading trade partner. For a variety of reasons, we can expect this pressure to increase in the light of the events of June. The Taiwan authorities, seeing the outrage among the general public at the behaviour of the Chinese government, will consider that the time is
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